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AbstractA lump-sum lowest bid method allows project administrators of public construction projects to reject any bid if they determinethe bid price is unreasonable. In practice however, few bids are rejected because of the lack of an objective process for evaluating thelowest bids. While past research assessed the bids based on total bid price, this study proposes a bid evaluation model developedbased on the level of unit prices. In the proposed model, the lowest bid is assessed according to the unit prices electronically obtainedfrom the owner and all qualified bidders. Moreover, a differential ratio is defined to measure the deviation between the unit pricessubmitted by both the owner and the lowest bidder. The merits of this innovative model are demonstrated by applying it to twosubprojects of a building construction project. 50134
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Practitioners and governmental officers have confirmed the feasibility of the modelprovided the languages or clauses describing the modeling algorithms are explicated in the general or special conditions of tenderingdocuments. 2005 Elsevier Ltd and IPMA. All rights reserved.Keywords: Project procurement; Competitive bid; Electronic bidding; Unit price and cost item 1. IntroductionA lump-sum lowest bid method awards the contractfor a construction project to the bidder who submitsthe lowest bid price. One major shortcoming of thismethod is that the submission of offers that are unrea-sonably low is not unusual. Awarding contracts tounreasonably low bidders frequently causes delays andresults in poor quality construction. Most such casesend up in contractual disputes or litigation. Also, statis-tically, projects awarded to the lowest bids are morelikely to experience excessive cost growth than are pro-jects awarded to more reasonable bids [1]. Although project administrators of public construc-tion projects are allowed to reject the lowest bid if thebid price is considered to be unreasonable, in reality,very few bids are rejected. Without an objective processdescribed in the tender documents to support their bidevaluations, a rejected bidder may challenge such a prac-tice by appealing to a court. Consequently, lengthycourt procedures can delay the procurement process.For example, Taiwan has tendered approximately201,819 public construction projects out in the last sixyear (i.e., from May 1998 to May 2004). Moreover, upto around 99.2% (=200,273/201,819) of the projectsadopted the lowest bid method for tendering. The aver-age bid ratio (winning bid pided by the project ceilingprice) of these projects was about 0.79. However, lessthan 1% of these lowest-bid projects had executed a pro-cess for evaluating the lowest bid, despite many ownerscomplaining that their lowest bids were suspiciouslylow.
The lowest bid method contains a prequalificationprocess to eliminate unqualified competitors. However,this process focuses on bidder performance of pastprojects and financial status rather than consideringhow each bidder plans to manage the current project(e.g., how the bidder allocates the costs to performthe work). Since the Taiwanese economy is currentlysuffering from low growth or even declining, unscru-pulous contractors may bid for a project using unrea-sonably low prices simply to obtain the project for thesake of their survival. A low bid price may be politi-cally desirable to project administrators, because itindicates that the project administrators are consciousof saving taxpayer money. However, an unrealisticallylow bid implies that the winner may cut corners dur-ing construction to maintain profits. Namely, the win-ner can perform the project in bad faith usingsubstituted equipment or materials with inferior qual-ity, constructing poor quality work, or allocatinginsufficient numbers of engineers and laborers for sav-ing costs (as a result, the management quality is im-pacted). Hence, ensuring that the lowest bid price isreasonable given the work to be performed is essentialto successful project procurement.Current models have focused on evaluating thelowest bid based on total bid price. That is, the lowestproject bid is identified as discordant or unreasonableusing statistical procedures that investigate the dis-agreement between the lowest total bid price and theother submitted bid prices. Learning from interviewswith several contractors in Taiwan, a rejected bidderwould be expected to respond to the project adminis-trators by asking: ‘‘which parts of my estimates areunreasonable or mistaken?’’ Certainly, the past ap-proach that assesses bids based on total-bid-price levelcannot adequately defend against such a bid-rejectionargument. Consequently, administrators of public con-struction projects in Taiwan remain very reluctant tochallenge the lowest bid because of the lack of aquantitative model to objectively review the lowestbid and to justify the decisions of the administrators.The Public Construction Commission (PCC; Execu-tive Yuan, Taiwan) – the highest government entityresponsible for public construction work – has initi-ated this work. This work proposes an electronic-facil-itated model that examines the lowest bid based onthe unit prices of cost items of the project. Theremainder of this paper is organized as follows. Thecurrent procurement practice of public constructionprojects is examined first. Past research on the biddingarea then is reviewed. Next, the proposed model is de-scribed, and its detailed workings are demonstratedusing two example projects. Furthermore, feedbackfrom the government and industry is given, and thestrengths of the model are discussed. Finally, conclu-sions are provided.2. Current tendering practice of public constructionprojects in TaiwanThe Government Procurement Law in Taiwan, sub-sequently termed GPL, was promulgated on May 27,1998, and took effect one year later [2]. GPL containsthree tendering procedures, including open tendering,selective tendering, and limited tendering. A public en-tity (project owner) generally applies open tendering toprocure most projects. Under open tendering, a publicnotice is issued to invite all interested suppliers to submittheir bids. Meanwhile, in the selective tendering proce-dure, a public notice is issued inviting all interested sup-pliers to submit their qualification documents forprequalification evaluation and, after the evaluation,the qualified suppliers are invited to bid. An entity canapply the limited tendering procedure based on compli-cated procurement situations. In the limited tenderingprocedure, two or more suppliers are invited to competefor tendering, or alternatively only one supplier isinvited.GPL has two categories of contract-awarding meth-ods: the lowest bid tendering method (LBT) and themost favorable tendering method (MFT). If the LBTmethod is used, a bidder that adheres to the require-ments set forth in the tender documentation and hasthe lowest bid price is awarded the contract. If a pro-curement entity adopts theMFT method (a type of multi-criteria bid evaluation method), the bidder with a tenderthat fulfills the requirements set forth in the tender doc-umentation and whose proposal is most favorable to theentity, is considered the winning bidder.If the lowest bid method is adopted, the projectadministrators or contracting officers normally shoulddetermine a project ceiling price or cost estimate to useas a threshold or reference point for accepting or reject-ing bids [2]. If the lowest bid exceeds the project ceilingprice, all bids are rejected; otherwise, the contract isawarded to the lowest bidder. Additionally, if the totalor a part of the offered price of the lowest bid is suspi-ciously low, and is likely to impair contract performancequality, then the project administrators can ask the low-est bidder to provide either a reasonable explanation oradditional security before the deadline set by the projectadministrators. If such a suspicious lowest bidder fails todefend his estimates, the contract is not awarded to thisbidder; and the bidder offering the second lowest bid isthen deemed the lowest bidder and the process repeats.Nevertheless, most project owners simply request asuspicious lowest bidder to provide an additional secu-rity (called a ‘‘differential security bond’’) to ‘‘protect’’their projects and are reluctant to evaluate the lowestbid. Such reluctance is largely owing to that the pro-ject procurement process is likely to be suspended ifthe rejected bidder appeals to the court regardingthe rejection decision (or to the Complaint Review Board for Government Procurement in Taiwan) andthe project administrators cannot strongly defend theirdecisions. Accordingly, very few bids are rejected.